US: February Employment Preview

We expect the BLS to report that non-farm payroll employment increased by 235k in February. This reflects an increase of 230k in private payrolls, and a 5k increase in government employment. We expect the unemployment rate to tick down to 4.7% in February, from 4.8% in January. Moreover, we expect a 0.3% increase in average hourly earnings last month. See Figure 1 for our February forecasts


Today’s ADP employment report was substantially stronger than we, and other forecasters, expected. ADP estimated that private nonfarm employment increased by 298k in February (Nomura: 215k, Consensus: 190k). The strength was broad-based.
The goods-producing and service-providing sectors added 106k and 193k jobs, respectively. The manufacturing sector posted a healthy gain of 32k jobs, and the weather-sensitive construction sector added 66k, likely driven by unusually warm weather. In light of today’s data, we have raised our forecast for the change in nonfarm payrolls in February by 20k to an increase of 235k (Figure 1). We increased our forecast for the
February increase in private payrolls to 230k (up from 215k.) For manufacturing payrolls, we expect a healthy increase of 15k.

Our forecasts reflect a number of factors.

First, the surge in business optimism since the election may be supporting stronger net hiring. Recent surveys suggest that business sentiment improved further in February from already elevated levels. The optimism of businesses is broad-based – small businesses (NFIB), manufacturers (ISM), non-manufacturers (ISM-non manufacturing), and home builders (NAHB). Regional surveys have also shown strong optimism about
current and near-term conditions. These indicators improved even further, which may have propelled more aggressive hiring (Figure 2). In particular, the number of employees index of the Philly Fed survey remained elevated at 11.1 and the Empire State survey
employment index marked 2.0, jumping to positive territory for the first time in eight months. The ISM manufacturing employment index, which covers the whole nation, showed a larger pick-up in recent months after the election. In addition to expectations for the new administration, a continuing recovery of goods exports along with increasing oil drilling activities could have contributed to job gains in the manufacturing sector. The jump in manufacturing employment in the February ADP report echoed optimism among manufacturers.


The economy continues to grow at a moderate pace. Our tracking estimate for GDP growth in the first quarter stands at 1.3%. In her last speech, Chair Yellen noted that the rate of payroll growth to absorb new workers (assuming no change in the LFPR) and
hence keep the unemployment rate at current levels would be 75-125k per month.1 We expect the pace of job creation to remain strong enough to tighten labor markets further.

Last, unusually warm weather in recent months seems to have provided a transitory boost to certain sectors. Based on our past analysis, construction and accommodation & food services are particularly sensitive to weather changes (Figure 3). During the
January survey period, those two sectors added 62k jobs in total. It is likely that this momentum may continue in February, partly fueled by the warmer-than-usual weather.


Recently, initial unemployment insurance claims have fallen to their lowest level since the early 1970s. These declines probably are driven, to a substantial degree, by the recent upsurge in business confidence.
However, to some degree, the downward trend in claims in recent years may also reflect underlying structural changes in state-level unemployment insurance programs. Since 2012, a number of states have shortened their maximum benefit duration, potentially

reducing the incentives to apply for claims and thereby deflating the total claims. We use data from the monthly Current Population Survey (CPS) to calculate month-to-month employment to unemployment flows as a proxy for layoffs, and match in state-level unemployment insurance claims. Estimating the relationship between layoffs and unemployment insurance claims pre- and post-benefit reduction reveals that while the states with reduced benefits experience a steeper decline in claims relative to the recently unemployed, accounting for this difference moderates the trend in claims only a bit (Figure 4). In addition, the relatively sharp decline in initial claims this year does not appear to be a consequence of these changes in unemployment benefit programs.
Our forecast for payroll growth in February is about 55k above the six-month moving average. Although 55k may sound like a lot, in a dynamic economy it isn’t. Every month about 1.1m positions are eliminated and slightly more are created across all businesses. That is, the widely reported changes in payrolls mask a high degree of monthly turnover. Remember, as just discussed, new unemployment insurance claims alone average well over 200k per week. If businesses became more optimistic and reduced their layoffs by 2.7% and increased job creation by 2.7%, these subtle changes could account for a 65k increase in payrolls. Likewise, looking ahead, if businesses become less optimistic, payroll growth could post much lower numbers.


Although average hourly earnings (AHE) experiences monthly volatility, it has been slowly accelerating for the past two years. As labor markets tighten further, we expect a gradual upward pressure on wages. Consistent with this trend, we forecast a 0.3% m-o-m increase (2.7% y-o-y) in AHE for February.
The slow growth in AHE is likely due, in part, to the influx of job seekers entering the labor market, encouraged by healthy pace of job creations. This inflow has offset the tendency for the labor for to decline as baby-boom generation move towards retirement. A larger labor force tends to reduce the impact of strong employment growth on earnings. Figure 5 shows that the average monthly changes over the past 6 months in labor force participation rate and unemployment rate have been close to zero despite some month-to-month fluctuations.

On the other hand, a 1.0% m-o-m drop in AHE in the finance industry in January, which held down the headline AHE, poses an upside risk. This drop is the largest percentage point drop ever recorded for this sector, and we suspect there may have sample reporting issues and therefore we expect a bounce back either through a revision to January or a large bump in February.

Unemployment Rate

We expect the unemployment rate (UR) to have fallen by 0.1 pp to 4.7% in February from 4.8% in January, staying close to the 4.8% level that is “in line with the median of FOMC participants’ estimates of its longer-run normal level” as mentioned in Chair Yellen’s speech on 3 March.2 While both the UR and LFPR experience small month-to-month changes, both series exhibit almost no long-run change over the past 6 months (Figure 5). Despite the effects of the aging population, enough people have been flowing into the labor force to hold the labor force participation and UR roughly constant. We largely expect this trend to continue but a period of above average job creation would put downward pressure on the UR.
However, monthly volatility in UR and LFPR poses some challenges in forecasting. As displayed in Figure 5, absolute monthly change of these series has been around one tenth on average over the past 6 months. This fluctuation partially explains some ups and downs we have observed in past months.

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